Monday, 30 January 2012

Is the advertised price too good to be true? Yes. (Part 1 of 2)

Sometimes an advertised "sale" price isn't as much of a deal as it's made out to be. Other times, the price you are offered turns out to be such a good deal that the seller doesn't want to honor it. This week, I have reports on recent examples of both sides of this "too good to be true" coin.

First, the advertisement that exaggerates the "regular" price and the discount being offered:

In December, Groupon advertised a one-day online sale on vouchers, each voucher redeemable for a package including:

2 airline tickets around the world;

3 excursions along the way with a "value" of up to $500 for each excursion; and

miscellaneous bells and whistles including a steamer trunk(!), 2 safari hats, in-flight food and drink, and one piece per person of checked baggage on each of the flights.

You might think that the "Groupon" name implies that customers are getting a discount in exchange for a group purchase, but this was anything but a "group" deal: Two coach/economy-class vouchers (each good for a pair of tickets) were offered for US$10,000 per voucher, and one business-class voucher for US$20,000.

All three of the vouchers Groupon offered were sold, including a coach-class voucher bought by Melissa and Trevor, a couple in Santa Fe planning to use them for their honeymoon trip around the world later this year.

Neither the coach nor the business-class price of the Groupon package was a terrible deal compared to the regular prices of its components.

What's problematic are the claims on Groupon's Web site that the $10,000 coach-class voucher had a value of $20,000 and was an "Epic Deal" being offered at a 50% discount.

In fact, as discussed below, this was at best a US$15,000 (not $20,000 as advertised) value in coach class, and at best a 33% (not 50% as advertised) discount from the normal price.

How much would this package have cost without the Groupon?

The RTW tickets included in the Groupon package have a peculiar set of rules that don't correspond exactly to the rules of any published RTW fare. But almost all of the itineraries that would fit within the rules of the Groupon deal could be ticketed at a published Skyteam RTW fare.

The Groupon deal includes only Delta, Air France, KLM, Alitalia, and a few of their minor affiliates and subsidiaries. Skyteam and its published RTW fares include a much larger selection of airlines including Aeroflot, Aeromexico, China Airlines (Taiwan ROC), China Eastern (PRC), China Southern (PRC), Kenya Airways, Korean Air, and Vietnam Airlines. And the Groupon deal, unlike any of the Skytem RTW fares for travel originating in the USA, allows for travel only within the Northern Hemisphere. So the Groupon deal allows only a very small subset of the itineraries that could be ticketed at a published Skyteam RTW fare.

The Groupon deal is limited to a maximum of 10 stops and 16 flight or surface segments (surface transportation not included in the fare but included in the segment count), but has no mileage limit. Skyteam published RTW fares have mileage limits which vary depending on the price. There are three or four Skyteam RTW fares in each class (coach or business), with progressively higher prices and mileage limits.

The least expensive coach-class Skyteam published RTW fare for sale and travel originating in the USA is the YRTWSKY3 fare basis, with a price of US$4,569 plus tax and a maximum of 29,000 miles. The most expensive is the YRTWSKY1, US$6,011 plus tax for up to 39,000 miles.

It's possible that you could find an itinerary using only the airlines allowed by the Groupon that would exceed the YRTWSKY1 mileage limit (39,000 miles) without requiring more than 16 segments or dipping into the Southern Hemisphere, but it would probably include impermissible backtracking, such as going back to one of the participating Groupon airlines' hubs in Europe to get between India and China -- something that could be done with fewer miles, without backtracking, with the additional airlines allowed by a published Skyteam RTW fare.

Even with that sort of backtracking, a 10-stop route (the maximum allowed by the Groupon deal) using all of the allowable airlines would probably still come in well within the mileage limit for an RTWSKY1 fare. For example, San Francisco - Minneapolis/St. Paul - Atlanta - Amsterdam - Moscow - Rome - New Delhi - Paris - Shanghai- Tokyo - Honolulu - San Francisco is only a little over 30,000 miles. That would qualify it for the YRTWSKY2 fare, $5,187 plus tax for up to 34,000 miles. But for comparison purposes, I'll assume that the Groupon purchasers managed to find a route flown by the Groupon airlines and qualifying for the Groupon rules would require the highest-mileage (39K) RTWSKY1 fare.

As for the rest of the items in the Groupon package, I'll take their word, for the sake of argument, on the value of each of the three US$500 excursions. A published-fare Skyteam RTW ticket would include one piece of checked luggage, and Alitalia, Air France, and KLM all provide food and drink (yes, including alcohol) at no extra charge, even in the back of the plane. You can get a steamer trunk for $50 or less at a garage sale, on Craigslist, or on eBay. That leaves only the pair of hats and whatever Delta charges on their domestic flights for as much as you can eat and drink. $500 is a generous overestimate of the total value of all of these incidentals.

Total value of the coach-class Groupon = US$15,000 (advertised as $20,000)

Price $10,000

Discount 33% (advertised as 50%)

If the "value" and "discount" figures in the Groupon ad are wildly exaggerated, where did they come from?

When I asked, Groupon attributed the value figure to Delta. According to Groupon's p.r. firm, "The tickets were offered at approximately 50% off what Delta quoted for a 10 stop ticket in N. America, Europe and Asia. Depending on how many stops each buyer makes (min of 3 and max of 10) and to what countries they travel, the price would vary based on variable fuel surcharges and taxes for different cities and distances flown but the economy pairs were essentially $10K for ~$20K worth of tickets and the biz class were essentially $20K for ~$45K worth of tickets."

(This US$45,000 "value" figure for the $20,000 business-class Groupon doesn't appear in any of the Groupon ads I can find, but it's even more inflated than the coach-class "value". The CRTWSKY1 Skyteam published business-class RTW fare, with the same rules as the YRTWSKY1 coach fare, is US$11,558 per person. That gives a total value for the business-class Groupon for 2 people of about $26,000, and a discount of about 23%.)

When I pressed for what specific itinerary or fare formed the basis for Groupon's value estimate, their outside publicist referred my question to Groupon's inside p.r. team, who had this to say about their methodology and sources of information:

In general, the offer value that we place on a deal may be based on a survey of other sellers, a particular seller's current or former price, or it may be a value suggested by the seller. With respect to the Jet Set (Epic Deal), we used a retail value of the airline tickets suggested by Delta Airlines based on their knowledge of their ticket prices and their industry.

At this point, no further comment from Groupon will be given.

Next I asked Delta: "(1) What value figure did Delta provide to Groupon? (2) What itinerary was it based on? (3) What was the basis for your value figure? (e.g. pricing of a specific itinerary? Published RTW fare applicable to the rules of the offer?)"

Delta referred my query to a London-based p.r. staffer -- odd since I'm based in San Francisco, Groupon is based in Chicago, Delta is based in Atlanta, and the person within Delta to whom I was referred claimed to have been unaware of the Groupon offer.

A series of reports from Delta's spokesperson on a quest for answers ("I will try and get some more background for you. I have emailed some colleagues to get some more background on this offer.... I have been trying to identify who put this together. I've ascertained it is not SkyTeam as I've liaised with that group and they are not involved. Looks more like a joint venture deal but trying to ascertain this and liaising with the European partners.... Definitely puzzling ... It's like a case of CSI-Groupon. I am keen to get to the bottom of this too and have various lines of investigation going... I am responsible for SkyTeam and Alliance activity and so I am therefore your correct point of contact. I can confirm I am working on getting you responses....") ended abruptly with this curt message on behalf of Delta:

I have received feedback from the team handling this and can confirm that we have no comment.

Is it legal for Groupon to advertise a $20,000 "value" for a package worth at most $15,000, when neither Groupon nor Delta can provide any basis for that valuation?

As I've mentioned before, and as state Attorneys General have complained of (with rare bipartisan near-unanimity) to Congress and the Department of Transportation, Federal "preemption" gives airlines and their ticket sales agents immunity from state and local truth-in-advertising laws.

That leaves the U.S. Department of Transportation as the sole policeman of airline ticket price advertising in the USA. Federal law and DOT regulations prohibit "false and deceptive" advertising practices. According to a letter to the airlines that the DOT pointed out when I asked about the Groupon ad:

Advertisements sometimes promote air fares in terms of a percentage savings (e.g. "Save up to 50%"). However, many such ads make it impossible to determine what the advertised fare is being compared to and how the percentage savings are calculated.

Consumers are entitled to real savings to match what the promotions promise. It is thus the Department's position that "percentage off" ads are deceptive unless (1) the "benchmark" fare (the fare to which the advertised fare is being compared) was offered for sale in reasonable quantities for a reasonable period immediately prior to the ad for the new fare, and (2) either the ad clearly identifies and describes the "benchmark" fare, or the "benchmark" fare is a discount fare comparable to the advertised fare, with similar restrictions.

There is no "benchmark" fare with similar restrictions to those of the tickets included in the Groupon package. None was identified in the Groupon ad, and when pressed, neither Groupon nor Delta could identify one. All Groupon would say is that the advertised "value" of the tickets was "suggested by Delta Airlines based on their knowledge of their ticket prices and their industry."

There's no way anyone could look at the ad, much less investigate it, and think it complied with the DOT's interpretation of the rules they are supposed to enforce.

So why hasn't the DOT done anything about ads like this? "The prices stated appear substantially lower than most airfares for similar flights on these routes," a DOT spokesperson told me.

So if it looks like a good deal to the DOT, the Department won't bother to investigate, not even to even read the ad to see if it identifies the "benchmark" it's using as the basis for its value or discount claims, or compare the advertised prices to the prices in the airlines' tariffs.

If questioned by the DOT, Groupon might try to claim that it isn't a "ticket sales agent" subject to the Federal rules. I don't think that's legally correct -- but even if it is, that would only get Groupon out of the Federal frying pan and into the California state fire.

States can't control interstate common carriers (or their agents) -- that's what's been preempted by the DOT -- but they have authority over all other sellers of travel. According to a fairly accurate summary from California's Attorney General:

California requires all sellers of travel to register with the Attorney General's Office and to display the registration number on all advertising. While not assuring that a company is reputable, a valid registration signals that the seller of travel has at least followed the law to be registered.

Several other states have similar laws, but California's is the most significant because every national travel company has customers in California. "Offer not valid in Rhode Island" is one thing for a national or multinational business, but "Offer not valid in California" is something else.

Groupon doesn't exclude California customers from the RTW deal (or any other offers, so far as I can tell), and the screenshot above (click here for a larger version) shows that they were specifically advertising it to customers they believed to be in California. Yet there's no California Seller of Travel (CST) number anywhere in the Groupon RTW ad or anywhere else I can find on the Groupon.com Web site, even if I supply a California address. A search for any business name containing "Groupon" in the California AG's database of registered sellers of travel finds no match.

The CST law applies to all sellers of travel to California customers, including in particular sellers of travel certificates and of travel packages that include airfare. The only exception to the California law that Groupon might claim is for those sellers of travel who act solely as agents of airlines -- and who are therefore clearly subject to DOT regulation as "ticket agents".

Depending on whether it is acting solely as an agent of the airlines when it sells travel packages that include airfare (unlikely when the packages include other services as well), Groupon is violating either the Federal prohibition on deceptive advertising of unsubstantiated airfare "discount" percentages, or the California Seller of Travel law. Or both.

There's a particular history of scams (mostly but not exclusively based in Florida) involving travel vouchers and certificates, and of state legislative responses. Edelman's survey doesn't include, but probably should have, the question of whether Groupon is complying with the specific requirements of the CST statute and similar laws in other states regarding travel vouchers. Groupon doesn't appear to have taken even the first step toward compliance: registering as a California Seller of Travel.

Somebody in Groupon's legal department should have figured this out before they got into the travel business. Or perhaps they did, but don't feel they have a business reason to comply with the law as long as the law isn't being enforced and deceptive advertising is profitable.

Buyers of the Groupon vouchers like Melissa and Trevor may not care if the value and the discount were exaggerated, as long as they got what they wanted and paid less than they would have otherwise. But did they?

It's hard to say without knowing exactly what destinations they wanted to visit. Tickets at a published Skyteam RTW fare would have cost more than the Groupon, but would have allowed many more itinerary options. And it might have cheaper still, and/or have had other advantages, to buy a package of tickets from a specialist travel agency or to assemble a package of tickets on their own, rather than to buy tickets at a published RTW fare.

I have a much more detailed explanation of the factors to consider in deciding whether to buy tickets for an RTW trip at a published RTW fare, as a package from a travel agency, or as individual tickets pieced together on your own, as one of the major new sections of the airfare chapter in the new 5th edition of The Practical Nomad: How to Travel Around the World. Each of these options is best for some travellers in some situations.

By way of full disclosure, I used to be on the staff of one such travel agency, Airtreks.com, and still have a relationship with them. If you use this link or others on this Web site to purchase your tickets, I'll get a referral commission. That's also true if you buy a ticket from Airtreks at a published RTW fare. That may still make you want to discount my comparisons between published RTW fares and packages offered by travel agencies, but it shouldn't have any effect on how I compare Groupon's prices to published RTW fares.

Judging what's a good deal is complicated by the fact that Delta, like many other airlines, doesn't make its RTW fares (or many of its other fares) available on its Web site. "SkyTeam 'Round the World' fares are currently only available by calling each airline's reservations department or seeing a ticketing representative," a Delta spokesperson told me last year when I contacted them while updating my book for the new edition.

Federal law and regulations used to require all airlines to make their "tariff" of fares available for inspection by the public at all "locations" where tickets are sold, which logically would include Web sites where tickets are sold. But the current Federal air tariff regulations (see 14 CFR §221.100) allow airlines the option either to make their entire tariff available (as in the past), or to post only their general rules and conditions of carriage and not the rules of specific fares. As Delta explained it to me:

14 CFR Part 221 requires that carriers make tariff information available to the general public, but that regulation provides for two alternative methods of compliance. The first method involves making filed tariffs available for inspection (see §§ 221.101 - .103). The second involves providing notice of the incorporated contract terms (§ 221.107). We opt for this second method of compliance, which requires that we make the full text of all terms incorporated into our contract of carriage available to any passenger who requests it. This is the contract of carriage and fare rule information published on our Web site.

Federal regulations still require airlines to provide each passenger with a "ticket", but most don't. Much of the information included in the electronic ticket record in the airline's database -- often including the price, the fare breakdown, and the "fair basis" needed to determine from the tariff what rules apply to the ticket -- isn't shown on e-ticket confirmations. The last time I travelled on Air France -- one of the airlines involved in the Groupon deal -- the closest thing to a "ticket" I ever received showed the price as "FREE" even though I paid more than $700, didn't identify the fare basis, and didn't show whether I was allowed to stop over at any of the transfer points (which was important to my travel plans, was undoubtedly included in the virtual coupon record, and would have been shown on a paper ticket or any proper electronic substitute for a "ticket"). I asked to inspect the tariff at the Air France counter when I checked in, but none of their staff at the airport were able to figure out how to retrieve the ticket record or the applicable tariff provisions.

I wouldn't be surprised if the tickets issued in exchange for the Groupon RTW vouchers are identified even within Delta's system as "FREE" or "non-revenue" tickets, like those given away for "promotional consideration" or other marketing purposes. But the Groupon buyers will probably never see their electronic ticket records, or know what (if any) fare would have applied if their tickets had been issued at the prices in Delta's tariff.

That doesn't mean that airlines should have to bring back paper tickets -- although that wouldn't be a bad idea -- or that airlines should have to create new records just to satisfy this law. Airlines already have complete "virtual coupon records" in their databases, in electronic form, and could provide them to passengers in the same electronic form. Airlines make their tariffs available to travel agents, and could easily enable visitors to their Web sites to search for and retrieve them from the same databases that travel agents use. But they don't, and they aren't likely to unless and until the DOT starts enforcing the law.

To be clear, some airlines allow visitors to their Web sites to view the rules applicable to specific fares, after they've found seats available in booking classes and on itineraries that qualify for those fares. But that's not the same thing as being able to look up the rules applicable to any fare -- for example, to figure out why it doesn't apply, or to what itinerary it might apply -- or to search for and retrieve all fares between a given city pair, regardless of availability. These are standard functions in any of the CRS's used by travel agencies, and essential to a transparent market in which travellers can make informed ticket buying choices.

Since Groupon and Delta have chosen not to comment further on which of them came up with the "value" figures in the ad, or how they did so, we can only speculate. My guess is that someone in the marketing department of one of these companies came up with the offer, got a few pairs of non-revenue tickets from their marketing allotment or budget assigned to the promotion, and simply made up a value based on what they thought such a set of tickets might cost.

Most people think RTW tickets would cost more than they do, and the person who put a "value" on the Groupon might never have heard of a "tariff" or "rate desk" or realized that Delta and travel agencies have people on staff (although fewer and fewer of them) whose job is to read the rules in the tariff and figure out the price applicable to any given itinerary, according to the rules in the tariff. Airline rate desks get prices wrong. That's why it's important to have access to the complete tariff. But being able to point to a price quote from Delta's rate desk for a particular itinerary, or for the set of rules in the ad, would have given both Delta and Groupon a basis for claiming that they'd made a good faith effort to vet the value claims in the ad.

As it is, their failure to have the rate desk price an actual itinerary and/or review the rules to determine an actual "value" of their offer resulted in a clearly false and deceptive ad.

No one would have thoroughly examined the offer as you had done. Catchy advertisements and clever grouping of offers are employed by many business firms and it is for the people to thoroughly check the offer before taking it.

Posted by: Anonymous, 31 January 2012, 06:13 ( 6:13 AM)

Hi Edward,

My name is Trevor, and I'm the "Trevor" from "Trevor and Melissa's Round the World Adventure."

First, I'd like to thank you for hosting your blog -- I've actually read several of your pieces. Melissa and I decided to travel around the world late last year, and your site was very helpful when it came time to research our options.

Second, I wanted to explain that Melissa and I agree with what you've written -- the Groupon deal is not, in any way that I can understand, worth $20,000 (even if it's a *really nice* steamer trunk). Maybe they threw together an estimate for a sample itinerary, purchased and compiled using only individual flights (i.e., *not* as a RTW fare); but that's not a fair comparison (no pun intended), is it? The best and most apt comparison is, as you've suggested, other round-the-world fares. We decided, though, that the Groupon was still a good deal for us: it cost less than most of the sample itineraries we had priced out using OneWorld or SkyTeam, we get to add some to-be-determined "experiences" worth as much as $1500 more, and the restrictions probably won't limit us in significant enough ways to make up that difference (we'll have to check out New Zealand later in life).

Anyway, you've presented a really interesting analysis, and it seems like you're probably right. It was a good deal for us, but could have been potentially misleading to consumers who hadn't already done some research (for example, if we hadn't already read blogs like yours and priced out some sample itineraries).

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